Mike Shedlock: “Economic Illiterate Proposal: “Inflation Creates Jobs”; Inflation Economics 101″ – Mish’s Global Economic Trend Analysis

Posted on :Jan 08, 2014

By: Mike Shedlock

Mish”s

December 24, 2013

Those looking for economically illiterate proposals can have a field day  reading Ezra Klein’s “Wonkblog” on the Washington Post.
In Full Employment Gives People Jobs Klein states (citing two  others) “The Federal Reserve Bank’s focus on keeping inflation below 2  percent effectively sacrifices the other half of its dual mandate: full  employment.
It’s difficult to know where to start debating such  economic lunacy, but let’s briefly discuss the notion of a “dual  mandate“.

Dual Mandate Equals Mission Impossible
Here’s the deal.
1. The Fed can control money supply but it will have  no control over interest rates (or anything else).
2. The Fed can  control short-term interest rates, but then it would have no control over money  supply (or anything else).
That is the full and complete extent of the  Fed’s “control”. Note that neither price stability nor unemployment is in either  equation. The reason is the Fed controls neither.
That is a mathematical  certainty, yet people have preposterous beliefs that the somehow the Fed can not  only control inflation but also unemployment.
If the Fed, the Bank of  Japan, the Reserve Bank of Australia, the ECB, or the Bank of England, or the  central bank of China could control the unemployment rate, rest assured they  would have done so long ago.
The economic illiterates will point out the  unique nature of the Fed’s dual mandate, but I will counter with the  mathematical stupidity of such an idea.
At best, the Fed can control  (using the word loosely) a maximum of one thing at at time, and employment is  not one of those things.

Does Inflation Create Jobs?
If  inflation creates jobs, where are the jobs right now in Venezuela? Where were  they in Zimbabwe? Argentina?
No doubt the economic illiterates will  state “wait a minute, we don’t want massive inflation, just the right amount  of inflation“.
But depending on which economic illiterate you ask,  the alleged “right” amount of inflation may be 2%, 3%, 4%, or even  higher.
So the debate rages “what is the right amount of  inflation?”
The debate itself is economic insanity. Inflation does not  and cannot create jobs in the long term.

Inept Monetarist  Choir
In the short term, inflation can create the illusion of  economic prosperity, but Klein and his monetarist choir cannot manage to see  their own noses even while looking in a mirror.
Yes, inflation helped  create a massive housing boom. Builders employed like mad. Speculators built  condo towers in Florida, Phoenix, Las Vegas, and numerous cities in California.  It was a grand party. All based on inflation.
Then the bubble burst.  Then a consortium of economic jackasses came along saying we need more inflation  (as if the cure was the same as the disease). The Fed tried, and tried and  tried. However, the Fed did not create enough inflation to satisfy the  monetarist jackasses, but it did create bubbles in stocks and bonds.
Benefits flowed to the banks, the corporations, and the already wealthy. That  gave rise to still more economic lunacy regarding income  distribution.

Inflation Economics 101
Ezra Klein needs to  brush up on inflation economics 101. I have a simple, easy to understand crash  course.

  • Ivory Tower Academics, Inflation, and Kindness
  • Inflation Targeting Revisited; Three Major Fed-Sponsored  Bubbles; Who Benefits From Inflation?
  • Reader Asks Me to Prove “Inflation Benefits the Wealthy” (At the  Expense of Everyone Else)

Practical Examples
Economic illiterates will tell you that deflation (for this example defined as  falling prices) is a bad thing. They will tell you that when prices fall, people  will delay purchases waiting for still more falling prices, and then consumers  will not buy goods and employment will drop and a downward economic spiral will  ensue.
That is the theory of people in ivory towers who read books and  articles by economists who cannot find their ass with two hands and a road  map.
If falling prices stopped people from buying goods, no computers,  TVs, monitors, or electronic goods would have been purchased for years.
Just yesterday I bought a 27 inch high-end NEC monitor for $800. It was one of  the top-rated monitors for digital photography display that I could  find.
It beats hands down my Dell 24 inch monitor I bought a few years  ago for $2400. Will monitors be better and cheaper next year. Of course. Did  that make me wait? Not in the slightest.

Lower Prices Spur Sales 
People hold on to things when replacement costs are high. Lower  prices, not higher ones, spur sales. Sales spur employment!
Think about  cars. If prices dropped 20% would that spur cars sales? I think so. If you could  replace your aging car 20% cheaper and it had more features, would you do  so?
What if they rose 20%? My guess is that, all thing being equal, car  sales would plunge

All Things Never Equal
Not to fear,  socialist fools don’t want all things to be equal. They want prices and wages to  go up. Well, history shows, and Klein even has charts to prove it, that wages  have not risen with prices.
To compensate for the fact that wages have  not kept up with inflation, socialists and monetarists want higher minimum  wages. They also want inflation targets and they expect businesses to pay more  in wages than prices go up!

How do businesses respond? They outsource or  replace humans with software and hardware robots that do not complain about  minimum wages.
In short, Klein proposes exactly more of the same  policies that caused the massive rise in income inequality in the first place.  His solution is more government controls, more Fed controls, and more  command-economy nonsense similar to what sunk the Soviet Union.
The  Real Problem

The problem is not falling prices, but rather the  inability to pay back  debt as prices fall. The irony is inflation encourages  more and more  debt, with bubbles of increasing magnitude over time. And each  time the  bubbles burst, complete fools shout for more of the same policies that  caused the bubbles.
I propose getting rid of economic jackasses at the  Fed and in Government. I propose falling prices are a good thing. Who doesn’t  want falling prices (except of course in asset prices). And who owns the bulk of  the assets? Here’s a hint: It’s not those who Klein thinks will be helped by  more inflation.
Unfortunately, Klein is more likely to get his way than  I am my way. As a direct result, expect more  crying from Klein and  others in his camp about rising income inequality. Also expect more inane  inflation proposals that will destroy still more jobs and the middle class.

Gold Goliath is not your typical gold dealer.

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